IRS Can Issue Summons to Taxpayer's Accountant As Long As Taxpayer Has Not Been Referred to the Department of Justice
KAHN v. UNITED STATES (November 20, 2008)
Shahid Khan was a partner in several investment entities. The IRS was investigating Kahn and his wife because of its belief that the Kahns had sheltered hundreds of millions of dollars from income taxes. The IRS agent assigned to the case issued summonses to Robert Greisman, an accountant and tax shelter expert with whom Khan and his wife had met on several occasions. The Kahns had paid Greisman over $8 million dollars but, according to an IRS affidavit, they could not identify what services he provided. The Kahns filed petitions to quash the subpoenas on a number of grounds. The IRS opposed the petitions and also filed a motion to enforce the summonses. The agent’s affidavit accompanying the motion stated that the purpose of the summonses was to quantify the Kahns’ tax liability. The Kahns opposed the motion on the ground that 26 U.S.C. § 7602(d)(1) prohibited the summons because the IRS did not disclose whether the IRS had referred Greisman to the Justice Department. The district court agreed, and quashed the summons. The IRS appeals.
In their opinion, Judges Flaum, Rovner, and Wood reversed. The Court first recognized the broad power of the IRS to issue summonses. Section 7602(d)(1) provides, however, that “[n]o summons may be issued . . . with respect to any person if a Justice Department referral is in effect with respect to such person.” The Kahns argued that the summonses were issued "with respect to" Greisman and were therefore not allowed if Greisman had been referred to the Justice Department. The IRS, on the other hand, argued that the summonses were issued "to" Greisman but "with respect to" the Kahns since it was the Kahns' tax liability at issue. The Commissioner of the IRS has promulgated a regulation supporting the IRS'ition. The regulation interprets the section to apply only when there is a Justice Department referral of the person whose tax liability is at stake. The Court approached the “question of first impression” under the Chevron two-part analysis. Under Chevron, the Court will uphold or strike a regulation if it is supported or opposed, respectively, by the plain meaning of the pertinent statute. If the statute is silent or not clear, the Court will determine in a second step whether the regulation is a reasonable interpretation of the statute. The Court will uphold it if it is. With respect to the plain meaning of § 7602(d)(1), the Court was attracted to the arguments of both parties. Having found their two competing interpretations both plausible, the Court necessarily found ambiguity in the statute. In its second step analysis, the Court found the Commissioner’s regulation consistent with the statute, as well as the legislative history, and a reasonable interpretation of it. As long as the Kahns were not referred to the Justice Department (which they were not), the summons to Greisman can be enforced.
